Price Destabilizing Speculation: The Role of Strategic Limit Orders / Suman Banerjee, Ravi Jagannathan, Kai Wang.

Format:

Book

Author/Creator:

Banerjee, Suman.

Contributor:

National Bureau of Economic Research.

Jagannathan, Ravi.

Wang, Kai.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30828.

NBER working paper series no. w30828

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

Using a two-period model of a commodity market with a large number of atomistic consumers and two strategic sellers, we show that a speculator with access to storage can lower the market price while buying and raise the price while selling by clever use of limit, stop-loss, and market orders. The speculator profits from it. This creates price volatility even though there is no demand or supply uncertainty, and all market participants act rationally. Prices are more volatile when the speculator has access to free disposal. Such speculative activity makes the strategic sellers worse off and consumers better off. Our results are robust to introducing demand uncertainty, having more than one large speculator, and more than two strategic sellers. When there are multiple strategic sellers consumers can be worse off.

Notes:

Print version record

January 2023.